The Monetary Authority of Singapore (MAS) has banned 10 financial institutions from selling structured notes, after their clients lost S$401 million by investing in Lehman-linked structured credit products.
ABN Amro, DBS, Maybank, DMG & Partners Securities and UOB Kay Hian received six-month bans; CIMB-GK Goh Securities, Kim Eng Securities, OCBC Securities and Phillip Securities got one-year bans; while Hong Leong Finance received a two-year ban.
MAS blamed poor training of salesmen and poor risk reporting for the losses, which happened after Lehman Brothers collapsed in September 2008. Lehman was a guarantor of some of the notes, known as minibonds, and an underlying reference entity in the High Notes 5 (HN5), LinkEarner and Pinnacle Performance notes. Its collapse caused the notes to default or redeem early, for significantly less than the principal amount.
The ten institutions issued a total of S$520 million worth of notes to retail investors; so far, with thousands of investors seeking settlements for their losses, the institutions have offered a total of S$107 million in compensation.
In its report on the mis-selling, published this week, MAS found the notes were sold to inexperienced retail investors, or investors who had asked for conservative portfolios. Despite their inherently risky nature; the institutions had failed to make sure that their sales teams fully understood the nature of the notes, and had in some cases misrepresented the risk involved in the notes to investors. Six of the institutions were brokers who sold the notes on an execution-only basis, but they should still have conducted due diligence on the products and failed to do so, MAS found.
On top of the bans, the MAS ordered the institutions to overhaul their financial advisory services across all investment products, and appoint an external person approved by the MAS to oversee the process. Distributors will also have to appoint a member of their senior management to oversee compliance with MAS' orders. The affected financial institutions will not be able to distribute structured notes until MAS is satisfied they have resolved these matters.
MAS warned that institutions should not take an "overly legalistic approach" when deciding on settlements. Even though clients investing in the notes were generally asked to sign documentation acknowledging risk warnings and disclaimers in respect of the seller's liability, the distributors should consider clients' ability to understand the products and the documents signed when assessing financial redress.
Shane Tregillis, deputy managing director for market conduct at the MAS, commented: "The industry as a whole needs to carefully reflect on these findings, take immediate steps to win back the trust and confidence of their customers and prevent similar problems from emerging in the future."
In response, the Association of Banks in Singapore, an industry body, promised that its members would tighten safeguards around the sale of investment products - including better investor suitability checks, better sales training, a seven-day cooling-off period for structured product sales, more due diligence on new products and changes to the link between sales and staff pay.
Minibond products have also drawn regulatory attention elsewhere in the region: institutions in Hong Kong have agreed to settle with their minibond customers in the face of an investigation by the territory's Securities and Futures Commission
See also: HKMA rejects claims it failed to express concerns on minibond risks
Litigation lawyers scent blood in Asia
SHKF buys back clients' minibonds
Hong Kong's SFC puts structured product approvals on ice
More on Regulation
Heavy regulatory costs and fragile systems will be problems in 2015
FSCP proposes simplified charges for UK asset management funds
Changing corporate culture will be hard work
A fixed set of weighted criteria can help pick out systemically important banks, according to the EBA
Sign up for Risk.net email alerts
Sponsored webinar: IBM Risk Analytics
Nominated for two technology awards
Nominated for post trade technology award
Sponsored webinar: Collateral and counterparty tracking
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.